Obama: Budget tightening could widen income gap

WASHINGTON (AP) — On the fifth anniversary of the Lehman Brothers collapse, President Barack Obama says the Republican focus on budget tightening could widen income disparities in the nation even as the economy climbs out of a debilitating recession.

Trying to lay claim to an economic turnaround, Obama acknowledged that despite progress, middle- and low-income Americans have not benefited as much as the top 1 percent in the country.

"We came in, stabilized the situation," he told ABC's "This Week" in an interview broadcast Sunday. He cited 42 months in a row of growth, 7½ million jobs created and a revitalized auto industry.

"The banking system works. It is giving loans to companies who can get credit. And so we have seen, I think undoubtedly, progress across the board," he said. Obama will kick off a series of economy-related events with a Rose Garden speech Monday. His National Economic Council released a report Sunday detailing the economic advances.

For Obama, the Lehman anniversary is an opportunity, after weeks devoted to the Syrian crisis, to confront public skepticism about his stewardship of the economy and to put down his marker for budget clashes with Congress in the weeks ahead. Lehman's was the largest bankruptcy in U.S. history, and its demise marked the beginning of the global financial crisis and was a major catalyst of the financial meltdown.

Obama emphasized that when it comes to a crucial deadline to raise the nation's borrowing limit next month, he would not negotiate with Republicans. They want to use the debt ceiling as leverage to cut spending further and to delay Obama's signature health care law.

Sunday's National Economic Council report is a catalog of Obama administration and Federal Reserve actions that the council's director, Obama economic adviser Gene Sperling, said "have performed better than virtually anyone at the time predicted." They range from the unpopular Troubled Asset Relief Program, or TARP, that shored up the financial industry and bailed out auto giants General Motors and Chrysler, to an $800 billion stimulus bill to sweeping new bank regulations.

Obama can point to a growing economy, rising housing prices, 35 straight months of hiring and a rebounding stock market. The financial sector has also recovered and banks are better capitalized. Five years after the federal government stepped in and infused banks with $245 billion in taxpayer money to avert a financial meltdown, the government has been paid back nearly in full.

This week, Obama intends to draw attention to that with daily events, including a speech Wednesday to the Business Roundtable, an association of CEOs from the top U.S. companies, and a trip to Kansas City Friday to visit a Ford plant where he will promote the strength of the auto industry.

But the public is not convinced that the economy is on the mend. Only one-third say the economic system is more secure now than in 2008, and 52 percent say they disapprove of Obama's handling of the economy, according to a Pew Research Center poll. There is still plenty of pain to justify their pessimism.

Despite job growth, the unemployment rate remains high at 7.3 percent. Though the rate has fallen, one of the reasons is because some people have dropped out of the labor force and no longer are counted as job seekers. The share of unemployed workers who have been unemployed for more than six months is more than double what it was in 2007 before the recession began. And the income gap between the very rich and the rest of the population is the biggest since 1928.

What's more, some banks that received government aid because they were deemed "too big to fail" are now bigger than they were in 2008, but they are smaller as a share of the economy than the largest banks in other big economies. Three years after Obama signed a sweeping overhaul of lending and high-finance rules, execution of the law is behind schedule.

This glass-half-empty-glass-half-full state of the economy has produced competing story lines about the role Obama's administration has played in getting the country to this point. Did Obama's approach validate the philosophy of spending your way out of crisis or did some of his policies actually slow the recovery?

In the ABC interview, Obama said globalization and new technology have contributed to the income gap in the country, and it has been building since before the recession.

He argued that his proposals to increase spending on education and public works projects are designed to counter that trend, but face Republican opposition.

"There's no serious economist out there that would suggest that, if you took the Republican agenda of slashing education further, slashing Medicare further, slashing research and development further, slashing investments in infrastructure further, that that would reverse some of these trends of inequality," he said.

Much of the credit for the current recovery, tepid as it may be, goes to the Federal Reserve. It has held short-term interests rates near zero and has undertaken a massive bond purchase program that has supported spending, lifted stocks and kept home mortgage rates at near record lows.

"The Fed was the single biggest policy move in the crisis. No question about it," said Douglas Holtz-Eakin, a former director of the Congressional Budget Office and top economic adviser to Republican Sen. John McCain's 2008 presidential campaign.

Now many say the economy needs long-term measures that would reduce spending on entitlement programs such as Medicare and Social Security and that would overhaul and simplify the tax system.

"We've done too much temporary targeted intervention, we're passed the time for that," said Holtz-Eakin, who now heads the American Action Forum, a conservative public policy institute. "It's no longer 2008 when things were falling like a rock. It's time to have long-term growth policies. We don't have them."

Obama and Republicans are at a stalemate, however.

Obama has proposed some changes that would reduce spending on Social Security and Medicare, including an adjustment that would lower cost-of-living adjustments. But he has insisted on more tax revenue by closing what he says are loopholes for the rich, a step Republicans won't take.

The impasse has revived threats of a government shutdown after the current budget year ends Sept. 30 and, more economically damaging, a default if Congress can't agree to raise the debt ceiling later in October.

Some conservative Republicans say they will only extend current spending levels or increase the debt ceiling if Obama delays putting in place his health care law, a condition Obama has flatly rejected.

"Never in history have we used just making sure that the U.S. government is paying its bills as a lever to radically cut government at the kind of scale that they're talking about," Obama said.

House Speaker John Boehner, R-Ohio, has tried to keep the focus on spending reductions, even as some on his right insist on defunding or delaying the health care law.

"This year the federal government will bring in more revenue than any year in the history of our government, and yet we will still have nearly a $700 billion budget deficit," he said. "We have a spending problem. It must be addressed, period."

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